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Long-term care policies and your rights

When it comes to long-term care insurance, regular readers will recall my negative feelings on the subject, but with my father approaching two years in a nursing home, I'm beginning to see how insuring this cost can make sense for many Americans. My "go-to-guy" for advice on the subject is Allen Hamm of Pleasanton, who wrote the definitive book: "How to Plan for Long-Term Care."

While Hamm started initially as a broker for these policies early in their development, he has since become a fee-for-service consultant and adviser. Apart from helping people make informed decisions about what products and benefits make sense, his consulting services have been a factor in helping folks collect what the courts finally decided they were owed. In one case, the settlement was about $200,000.

To make an informed decision, the process starts with an assessment of the overall financial situation. The fundamental that applies to all questions involving insurance is that "it never makes sense to insure something you can afford to pay for yourself." Simply trading dollars with an insurance company typically means that about 30 percent of what you pay in premiums just disappears in administrative costs, commissions, dividends to stockholders and the cost of layers and layers of management overhead. This is why high deductibles (within what someone can afford) always make sense.

So, if a person approaching retirement sees that they have enough in the way of assets to pay for what could be many years of assisted living and nursing home care, they and their heirs are probably better off self-insuring that cost by continuing to save and invest in retirement plans what they otherwise would have spent on LTC insurance premiums. The odds are about what the long-term care insurance carrier has predicted, and the results for the typical retiree will leave them, in the end, with about 30 percent more money -- on average.

The absolute worst case would be one in which someone exhausts all of their assets, including home equity and retirement plans. In this case, state programs pick up the cost of nursing home and medical care. Anyone (including their heirs) who see this as a possibility after careful consideration of current financial circumstances would be advised to consider long-term care insurance.

What makes long-term care policies work is the basic concept of insurance first conceived by Phoenician ship owners. You form a group of people that among them will have equal parts of good luck and bad luck, but you collect the same amount of premiums each year from everyone in the group. In the case of long-term care, someone who pays premiums for many years and then drops dead of a massive heart attack has subsidized the cost of the next guy who lingers with a debilitating condition for many years while collecting his long-term care monthly payments. It all evens out.

My past columns have railed about the extent to which long-term care insurance premiums have been allowed to increase by state insurance commissions. In my mind, this has been a gift to the insurance industry that failed to anticipate that: 1) interest rates and earnings on premiums would drop, 2) people in assisted living would incur claims longer than expected, and 3) most people would continue to pay premiums instead of giving up after 10 years or so.

For the many who are struggling to collect their benefits after being denied for spurious reasons, I would suggest small claims court. The maximum claim can now be as high as $10,000 and this may be one of the most effective techniques for collecting what is typically a few months of denied claims. Online assistance makes small claims an easy way to duke it out with major insurers and embarrass them into submission.

Meanwhile, all LTC policyholders should take the time to write to Dave Jones, the California insurance commissioner, and suggest that he require insurance companies to honor the marketing materials they used to sell policies years ago that clearly implied that "buying policies at a young age LOCKED IN low premiums." Let the grossly profitable insurance industry adjust premiums on any new policies they hope to sell, but keep their promise on what they've sold. It shouldn't be our problem if they've forgotten what business they're in.

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